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Why Islam markets fell behind

Islamic markets were well developed and introduced many herbs and spices from the East, such as nutmeg, cloves, saffron, and senna. Here you can the see vibrant atmosphere that surrounded these markets, but also the expectation that business was an one-on-one transaction.

source: "Islamic Influences," Thinkquest, available online: http://library.thinkquest.org/25983/ISLAMIC%20INFLUENCES.HTM

Islam's Lead in Science does not create vibrant markets

Why?

If, as Mrs. Mckee's website explained, Islamic societies created the best science, great markets and expanding prosperity and wealth, why does the laissez faire capitalist mode (think Adam Smith) dominate today?

Are there historical reasons for the decline of the Islamic technological advantage?

Many people have tried to explain the decline and some of the following statements have been presented as answers. How do you feel about them? Are they correct?

  • Islamic education discourages creativity
  • Muslims are close minded
  • Religions are conservative and as such tend to block progress and resist innovation
  • Islam counsels against wealth and promotes charity and modest behavior
  • Islam bars women from participation in the market place and therefore wastes 50% of its resources
  • Islamic religion proscribes lending by forbidding interest on loans; there is little profit incentive to create healthy markets

Here is another image of an Islamic market, this one from Iran, the Kashan Bazaar. Persian architects used these structures to naturally decrease temperatures, regulate sunlight, and ventilate the interior spaces during the daytime. Again we see how technologically advanced they were and how markets played a vibrant part in their society.

source: "Kashan," Wikipedia, online available:

http://en.wikipedia.org/wiki/Kashan

Islamic markets and wages fall behind
So how do we explain the European ascendance? To understand the problem we have to examine history. Islamic markets kept pace with European ones until the 17th century. By the 18th century, European travel logs report declines in the Islamic market places. Also, Islamic workers earned less on average than European workers. Wage incentives spurred growth of European markets over Islamic.

The following graph gives you some indication of how living standards were in European cities versus Istanbul in the Ottoman empire.

Look at how only Florence/Milan workers earned less than the workers of the Ottoman empire. Notice, while for most of history the wages remain fairly constant, at some point, European wages "take off" and leave the Islamic workers behind.

Source: Sevket Pamuk, "Prices and Real Wages in the Middle East, 1469 to 1914" available online: http://www.sba.luc.edu/orgs/meea/volume2/pamuk.htm

How can the discrepancy be explained? One way would be to look at the technology created in Europe, thanks to the Scientific Revolution, arguing that European technology just outpaced the Islamic, leaving the Ottomans to lag behind, as the Europeans had lagged during the Middle Ages. OR, consider what else changed in Europe around the time of the Scientific Awakening: the Reformation, the response of the Catholic Church, and the growth of a new mind set regarding the role of the individual. In China and Japan, there was no cultivation of the role of the individual, and in the Islamic empires the group came before the individual. Only in Europe, did humans start to value the individual and only in Europe did markets take off.

Vibrant European market places encourage new trade routes

The medieval market scene. Trade routes were increasing.

Three processes were at work to explain why Islamic markets fall behind vis a vis Europeans:

  • Europeans started to catch up technologically (both Islam and Europe were improving)
  • Europeans developed new mind set based on the "individual" (Islam starts to fall behind)
  • and finally, the Catholic Church (long interested in money matters) provided crucial information to aid markets

Three crucial developments in Europe thanks to the Church affected the market place Adam Smith was to applaud:

  • partnerships
  • inheritance
  • corporations

image source: http://pages.britishlibrary.net/alan.myers/newc/newcastle.html

Hey?! These are part of religion?

Well yes, in fact, the Catholic Church was interested in how it would gain revenues to maintain itself and its empire. In fact, the first accounting skills would grow from monastery books. Churches were central to towns and the business they did. So yes, markets and the Church remained linked. But more importantly the links between the Church and markets in Europe were different than the relationshiop between Islam and the markets in the Muslim world. Those differences not only gave Europeans an edge, Islam rules tended to hold back their markets in these areas.

Important contributions of the Catholic Church to market development vs. Islamic markets and institutions

Partnerships:

This picture depicts the bestowing of partnership documents to two silk road traders allowing them to pursue their business plans.

image source :

"Tracing the Silk Roads," After the Fact Interactive (McGraw Hill)

 

Think back to Ibn Battuta's descriptions of goods traveling along trade routes to various global markets. Most of these goods would have been handled by a partnership (remember all those middlemen the Europeans wanted to avoid paying?). The partners usually had one person with the financial ability to fund a trip and another with the willingness and knowledge to undertake the journey to purchase goods and bring them back. The profits of the partnership were: immediate (you made it back and sold your goods or you did not); unique (partnerships were not created for multiple trips); and finite or limited (beyond that one contract there were no assets - no business).

What changed?

In the Islamic world, very little. But in Europe the idea of creating a "business" or firm that would contract for multiple tasks grew (not surprisingly inspired by the Church, which if you think about it, is in fact, a "business" of sorts). Thus supply for markets was growing more vibrant, stable and developed.

Meanwhile, in Islam the risks of losing every thing if one journey did not succeed tended to keep partnerships small because people sought ways to minimize their risk. Supply for markets in the Islamic world remained static.

Inheritance

Here is a depiction of "wards" (lawyers) reading through the will and dispensing the assets.

image source:

http://renaissance.dm.net/compendium/41.html

Europe had a system of "primogeniture" allowing assets to stay concentrated. The Church also encouraged donations upon death, so a complex understanding of wills developed in Europe. This understanding would allow for assets to be protected and grow even past the death of the original owner. Access to resources makes more business possible and therefore market supply goes up.

Under Islamic law, upon death all progeny (children) must be treated equally (women even got half a share of the men; very egalitarian by European standards that often prohibited women from inheriting). Partnerships often dissolved upon death rather than figure out how to accommodate all the children of a deceased partner. Because wealth got "diluted" by all the children, there was little incentive to gather it and build better businesses. Nor did the capital exist to increase supply of goods to the market place.

Corporation vs. Waqf

This turkish bath was built as a waqf in Instanbul.

image source :

http://www.turkishbaths.org/turkishbathwoflash/historyturkishbathn.html

 

Waqf

Definition: unincorporated trust established under Islamic law by an individual owner of property to provide a service forever. These waqfs often funded libraries, schools, parks, and roads (you might remember from your Islam projects, discussion of how sheiks funded water projects and roads). They often provided huge public works projects with funding through charity.

Waqfs were a religiously sanctioned way to avoid having the government tax your money. People always seek ways to protect their money from the government and waqfs were no different becoming highly popular and widely utilized. By 18th century, waqfs owned 1/3 of all the real estate in the Ottoman empire (so these corporations, not individuals, nor the ruler nor the state owned approximately 30% of all the resources!). In Istanbul, 30,000 people were fed by waqfs DAILY.

Waqfs provided services, not goods, forever creating little incentive for the waqf to grow, be more efficient, or even succeed. According to the waqf's terms, it must always receive funds even if the services or funds never get used! In fact, many libraries in towns along the silk road saw no patrons after the silk road fell into disrepair. The libraries continued to operate despite nevering being utilized because of the waqf's terms. The system of waqfs prevented resources and knowledge from moving to where it might have been better utilized, creating more market development.

Meanwhile in Europe, corporations had been sanctioned by the Church since the 8th century. The first business corporations (ie corporations outside of the Church) emerged in 1600s borrowing the knowledge and expertise of the Church to create new business ventures. Thanks to these new businesses, Adam Smith was able to observe the growth of the "invisible hand" in Scotland.

Conclusion

The reasons behind the ascendence of Eurpean markets over Islamic ones were not simple nor did European markets succeed and Islamic ones fail. It was not a zero sum relationship. Rather, several factors cames together to support growth in the marketplace that allowed Europeans to grow at a much more rapid rate than any other area of the world.

Vibrant Markets require:

  • strong individuals
  • technology to spur development
  • professions with experience (corporations, lawyers, accounts)
  • resources to build with (capital to make loans and buy goods)
  • dynamic systems (change) over static ones (stability)

 

 

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This website grew out of two conferences: SIEPR 2005, and a talk by Timur Kuran from USC, and The Global Fellows Program by BATDC.